Powered by MOMENTUM MEDIA
investor daily logo

Here be dragons

  •  
By Lachlan Maddock
  •  
5 minute read

SPECIAL REPORT China is set to emerge from COVID-19 stronger than ever. So what’s next for the country that will shape the future of the global economy?

While China was initially ravaged by COVID-19, launching draconian quarantine measures that saw entire cities locked down and its manufacturing sector devastated, the recovery is well and truly on the way. 

“China’s economic recovery from the coronavirus tragedy currently appears to be more ‘V-shaped’ than originally expected,” Alistair Way, head of global emerging market equities at Aviva, told Investor Daily. “Helped by considerable stimulus efforts from the government, we have seen a pretty strong pickup in a variety of infrastructure-linked sectors such as cement and heavy trucks, where activity is already back above pre-crisis levels.”

Consumer spending has also increased, helped in part by enthusiasm for new 5G phones, although demand for travel, lodging, restaurants and other services remains depressed. But while China may have its eyes firmly on the future, it isn’t quite out of the woods. At last week’s 13th National People’s Congress, China was forced to abandon its GDP growth target in the face of COVID-19 “uncertainty” and while stepping up its globally unpopular campaign against Hong Kong. 

==
==

“China’s medium-term economic challenges remain the same – in short, the reorientating the economy from infrastructure-led to consumer-led growth and de-gearing, while maintaining the level of GDP growth and income progression the population expects and ensuring the stability of a fragile financial sector,” Mr Way said. “A depressed global growth backdrop because of COVID-19 and geopolitical tensions [makes] achieving these targets even more challenging.”

At least one threat to China’s global economic primacy is company and capital flight, with some companies facing pressure to onshore their workforces to aid the recovery while India has been courting a number of American companies with affordable labour and legislative reforms to make moving business out of China more attractive. That’s a trend that COVID-19 is accelerating, with many lower margin and labour-intensive sectors already moving out of the country, but it might not be one that does any significant damage.

“China as an economy is far less export-dependent than it was 20 years ago and the domestic economy and consumption are far more important,” Andrew Gillan, head of Asia equities ex Japan at Janus Henderson, told Investor Daily. “This attracts many foreign businesses to China too, remember. Companies will continue to diversify sourcing and manufacturing but it also needs to be cost-effective and efficient and countries like India also face their own challenges attracting foreign investment.”

Massive disruption of global supply chains and the prospect of a new trade war are also accelerating the trend – but some sectors might find it harder than others to shift production out of China. 

“Global companies have seen the potential risk to their supply chains from an overdependence on China and the risk of tariffs affecting their costs, so are keen to diversify,” Mr Way said. “That said, China retains some overwhelming competitive advantages as a manufacturing base in many industries with good infrastructure and skilled labour.

“It would be difficult and costly to shift smartphone assembly, for example, from China to India or indeed to the US.”

While President Donald Trump managed to get his phase one deal across the line before COVID-19 effectively ended any chance of a peaceful resolution for the trade stoush, the crisis has seen a return to saber-rattling by both sides. 

“There is already a higher risk of a return to tensions with the US government’s decision to block supplies of some technology to Huawei and there is equally a risk that China will respond to this,” Mr Gillan said. “Given the COVID-19 economic weakness, I am somewhat surprised that either side would want further economic damage as a result so it may be that like the trade dispute, we get some sort of resolution and face-saving for both parties.”

China has already indicated that it may turn to the US for some agricultural products to fulfill its obligations under the phase one deal, potentially kneecapping Australia’s economic recovery in order to prevent another escalation. But it could find itself back in the crosshairs if it doesn’t play its cards right. 

“On top of the huge impact on the global population and economies from the coronavirus, the prospect of renewed trade tensions between US and China this year is not welcome,” Mr Way said. “There certainly appears a big risk of China being a political scapegoat as Western governments look to deflect blame in their handling of the crisis, most notably in the run-up to the US presidential elections in November.”

With America yet to emerge from its lockdown – and facing the prospect of a second wave of infections when it does – China will reap the economic benefits of its fast recovery. And with programs like Made In China 2025 set to catapult it towards becoming the world’s high-quality goods manufacturer, and regional powers still playing possum in the face of Beijing’s wrath, the stage is set for China’s victory lap.

Here be dragons

SPECIAL REPORT China is set to emerge from COVID-19 stronger than ever. So what’s next for the country that will shape the future of the global economy?

investordaily image
investordaily image
ID logo

Comments powered by CComment